“While the equity market rally in 2012 was impressive, the drop in S&P 500 index volatility markets, as well as realized correlation, was even more dramatic,” says Barry Knapp, chief equity strategist at Barclays. “However, these measures have moved higher with recent negative macro developments.”

For stock pickers, this isn’t exactly a welcome development. In the second half of 2012, single stocks often moved in unison as company-specific fundamentals tended to be trumped by macroeconomic developments.

As the chart shows, while correlation has turned slightly higher, it still remains at a pretty depressed level.

That said, Knapp points to a slew of reasons to think that correlation could ramp higher. He notes European growth is slowing, the Fed isn’t expected to implement QE3 anytime soon and U.S. housing and labor data have flattened. Earnings are exceeding expectations, but guidance “still seems biased to the downside,” Knapp adds.

“So with all those negative macro developments, we believe the rebound in correlation…is justified,” Knapp says. “The important question is, of course, if the move is sustainable and how long it might persist.”

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